Market Report: Home Retail trades lower on forex fears

Home Retail Group, the owner of the Argos chain, lagged behind the wider market, which was lifted by some strong performances in the banking sector last night.

The retailer eased 2.25p to 219.5p amid concern – prompted by an HSBC report – about its ability to deal with the impact of the pound's weakness against the dollar. Like their counterparts in other parts of the business world, companies such as Home Retail insure themselves against adverse currency movements by implementing certain specialist financial strategies – or hedges.

According to HSBC, retail sector hedges generally expire by mid-summer, leaving companies facing the prospect of a steep rise in the cost of products sourced from outside the UK and paid for in dollars. Under normal circumstances, companies try to pass on as much of the pain to their suppliers or in some cases to their customers. But in the current economic climate both strategies are constrained, with the recession stressing profitability at suppliers and causing consumers to tighten their purse strings.

"In our view, the clear loser on this issue is Home Retail Group," HSBC said. "In recent years, management has built its earnings case on creating more commonality in sourcing between the [company's] two divisions [Argos and Homebase], cutting out agents and importers, and buying as much as possible directly from the Far East. This strategy will now pay out in reverse."

"Further, Argos's position as a price leader ... means that it will be more badly positioned than most of the rest of the sector in raising prices," HSBC added.

Financial stocks led the way as a positive reception for the Government's asset protection scheme overshadowed news of record losses and another state-backed capital injection at the Royal Bank of Scotland. The lender, which surged to 29p, up more than 25 per cent or 5.9p, will tap in to the programme to insure against further losses on toxic assets and risky loans worth £325bn.

Lloyds Banking Group, which is expected to detail its participation in the scheme when it posts results this morning, was more than 30 per cent or 17.6p stronger at 75p.

Legal & General, more than 27 per cent or 9.6p ahead at 44.5p, shrugged off news that Lansdowne Partners had raised its short position in the stock to 0.79 per cent.

Prudential, which was 13.9 per cent or 37.2p stronger at 305p, ignored Goldman Sachs, which reduced its target price for the stock to 400p from 600p.

Elsewhere in the market, as investors regained their appetite for risk, short sellers were said to be abandoning their downside bets around certain geared companies, including the pubs group Enterprise Inns, which swung to 58.7p, up more than 30 per cent or 13.7p, and the sub-prime lender Cattles, which jumped 0.8p or 20.6 per cent to 5.1p.

The improved mood also prompted some profit-taking in the gold producer Randgold Resources, which was the weakest of the blue chips, losing 5.1 per cent or 165p to 3,030p.

BP, down 5.2p at 459.2p, was unsettled by talk that the oil giant's dividend might be at risk in light of the crude price weakness.

Trinity Mirror fell 5p, or more than 12 per cent, to 35.2p, after the newspaper publisher suspended its dividend in light of tougher trading conditions.

Back on the upside, ITV, up 8.2 per cent or 2p at 26.2p, continued to draw steam from reports that it was looking at a tie-up with rivals Channel 4 and Five. The move came despite some cautionary words from UBS, which said that, although it may be argued that such a move is required to ensure the future of free-to-air broadcasting, "it would be at the expense of advertisers and viewers, and we think would face insurmountable competition and plurality issues".

The broker said: "Rather than relying on a regulatory bailout, we believe a better solution could be for ITV to undertake a rights issue and adopt a subscription model which could create significant value for shareholders." The broker added that it expected a suspension of the dividend and the announcement of a possible disposal of non-core assets such as the Friends Reunited social networking website when the group posts results next week.

Among smaller companies, Cadogan Petroleum endured a bruising session, slumping by an eye-watering 31.7 per cent or 2.7p to 5.8p. In a statement issued around the end of play, the company announced that the Higher Administrative Court of Ukraine had overturned a favourable ruling by a lower court in its ongoing dispute over one of its licences in the country.

The company added, however, that the ruling did not affect the legitimacy of the licence in question, saying that new legal proceedings would need to be brought against Cadogan and would need to succeed before its interests were affected.